This version of this article is from our December 2024 Bank & Finance Newsletter. To see the original article from August 2024, click here.
The Federal Trade Commission (FTC) has struck out in enforcing its final rule banning employment noncompetes, but there are more innings to go. Keep in mind that the rule would not have applied to entities exempt from the FTC’s jurisdiction (including banks, savings and loan institutions, and credit unions). However, federal banking regulators retain discretion to apply the rule to entities under their jurisdiction.
How did the Court Rule, and Why?
The Northern District of Texas had previously enjoined enforcement of the rule on a preliminary basis as to the parties in that case, Ryan, LLC, et al. v. Federal Trade Commission. Read more about that decision here. On August 20, the same court issued a final order granting summary judgment to the rule’s challengers and denied the FTC’s motion for summary judgment on the same issues, declaring, “The Court sets aside the Non-Compete Rule. Consequently, the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”
In short, the court reasoned that in issuing the rule banning noncompetes, the FTC exceeded the powers granted to it by Congress in the FTC Act. Given the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, however, this is hardly a surprise. Loper Bright had been issued mere days before the Northern District of Texas’ original opinion. After more time and when ruling on the merits, the court relied on Loper Bright in ruling that the FTC did not have authority from Congress to issue this kind of rule banning noncompetes.
While that lack of authority was the court’s primary reasoning, it also reasoned that the rule violated “the APA’s [Administrative Procedure Act] arbitrary-and-capricious standard.” Echoing some of the criticism following the rule’s issuance, the court found the rule “unreasonably overbroad without a reasonable explanation. [It] imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’”
This section of the opinion could be viewed as a road map for how to successfully challenge administrative rules given the Supreme Court’s decisions this term altering the standards and timing for such challenges.
What Comes Next?
For now, the rule has been invalidated and cannot be enforced, but appeals are likely. We now have decisions from district courts reaching different conclusions, but only the Northern District of Texas’ decision is ripe for appeal at this point. Given the several months that the appeals process takes and the slim odds that one or more of these challenges makes it on the Supreme Court’s docket in the upcoming term, we have several months to go before receiving the kind of certainty that a decision from the highest court in the land can provide.
How Should Employers React?
While the immediate concern presented by the FTC rule has been mitigated, noncompetes may face continued challenges at both the state and federal level through other legislative or regulatory initiatives. For example, the FDIC’s Final Statement of Policy on Bank Merger Transactions, effective October 28, 2024, provides “the FDIC generally expects that the selling [insured depository institution] will neither enter into non-compete agreements with any employee of the divested entity nor enforce any existing non-compete agreements with any of those entities.” Employers should consider this trend when entering new agreements and determining what restrictions may be appropriate and necessary to protect their businesses in the future.
This current climate still presents an opportunity for employers to take stock of their current practices and determine whether changes are necessary before being forced to do so by applicable law. For instance, to the extent an employer does not currently limit noncompetes to “senior executives” or certain leadership positions, it may consider doing so for practical reasons and in anticipation of future changes in applicable law, including the state-by-state rules that may apply. However, nothing in this decision compels employers to act at this point.